Geoffrey Smith/Investing.com | May 24, 2019 12:16
So, what has changed for U.K. assets now that Theresa May has succumbed to the inevitable and announced her resignation as prime minister?
The foreign exchange market’s received wisdom since before the referendum has been that Brexit will do long-term damage to the U.K. economy and it has followed from there that sterling reacts negatively every time a Hard Brexit becomes more likely and rallies strongly any time the U.K. looks like having second thoughts about the whole thing.
Right now, a Hard Brexit is looking more likely. As much as anything in politics is certain, May is certain to be replaced by a more ardent Brexiteer.
A YouGov poll last week showed ex-Foreign Secretary Boris Johnson was the preferred candidate of 39% of Conservative Party members, 26 points ahead of former Brexit Secretary Dominic Raab. But Johnson first has to convince Conservative lawmakers he can lead them, something they refused to do back in 2016 when his decision to back Brexit undercut then-Prime Minister David Cameron.
“The modest support sterling and U.K. rates have enjoyed since her announcement is somewhat remarkable,” said Tim Graf, head of macro strategy EMEA at State Street (NYSE:STT) (NYSE:STT). “We suspect that support will prove temporary.”
Graf noted that parliament “has almost no options at its disposal to check any future Prime Minister who wants to leave the European Union without a deal.” (For an exhaustive analysis of why not, read this blog post from earlier this week by Maddy Thimont Jack, a senior researcher at the Institute for Government in London.)
But if the new PM won’t be constrained by procedure, he or she will be constrained by politics and economics. The opposition to No Deal from business, from sitting lawmakers and from the broader electorate is real. The Conservatives will have lost votes to pro-Remain parties as well as Nigel Farage’s Brexit party in this week’s European elections, and the actual disruption from a Hard Brexit is something no Prime Minister will want to own.
Faced with that reality, the new leader will face the same choices: a) deliver Brexit with much economic pain, losing the next election b) abandon it at a cost of dividing the Conservative Party, losing the next general election or c) somehow kick the can further down the road, an option which by no means escapes the downside of options a) and b).
There are ways out.
The new Prime Minister could call yet another general election in pursuit of a clear mandate for No Deal, as May did in 2017 (to disastrous effect). Another would be to call another referendum to “confirm” the popular will for No Deal, although that would inevitably divide both nation and party again. But both options could provide political cover, either pushing Brexit through or retreating from it.
Awkwardly, further dithering is not really an option either. Rem Korteweg, a policy analyst with the Clingendael think tank in the Netherlands, argues that the likelihood of continued paralysis in the U.K. puts the country’s fate back in the hands of the EU. The remaining 27 may be more inclined to listen to French President Emmanuel Macron the next time the U.K. asks for more time to play politics with itself and to refuse any further extension of the deadline for Brexit.
At that point, a project that promised prosperity and freedom would finally have ended – as the currency market never fails to remind us - by leaving the U.K. poorer and at the mercy of bigger trading blocs.
Written By: Geoffrey Smith/Investing.com
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.